Hutchison China Meditech IPO: Don't Ignore This Potential Chinese Pharmaceutical Giant

| About: Hutchison China (HCM)

Summary

Hutchison China Meditech IPO prices below initial guidance.

Company has strong partnerships with AstraZeneca and Eli Lilly.

Strong consumer drug portfolio offsets some of the risk and provides necessary cash for drug funding.

After 10 years of trading on the London Stock Exchange, investors in America are getting easier access to a promising Chinese pharmaceutical company. Hutchison China MediTech Limited (NASDAQ:HCM) hit the U.S. stock market with American Depository Shares.

The prospectus for Hutchison China MediTech reads rather confusing with joint ventures, parent companies, and a Cayman Islands base. When all of that is stripped away, what investors have here is a promising Chinese pharmaceutical company. Hutchison China MediTech has an amazing portfolio of drugs, which includes some amazing U.S. partners. The company also has a nice consumer drug portfolio in China, which is providing ample cash to fund research and operations.

Hutchison China MediTech is partnered with giants AstraZeneca (NYSE:AZN), Eli Lilly (NYSE:LLY), and Nestle (OTCPK:NSRGY). The company also has a joint venture with Hain Celestial (NASDAQ:HAIN). The company is aiming to become a global leader in oncology and immunological diseases. Hutchison has seven clinical-stage drug candidates, including five that have already achieved the proof of concept stage. Of the seven drugs, four are still wholly owned by Hutchison China MediTech, setting up strong potential catalysts in the future with either higher revenue producing drugs, or new licensing deals. Beyond the seven clinical-stage drugs, Hutchison also has 20 additional drugs entering clinical trials. This includes five trials that were expected to start in the first quarter.

The company's two biggest potential drugs are savolitinib and fruquintinib. Savolitinib is on pace to have a new drug application filed in late 2016. Fruquintinib is also approaching a NDA, with late 2016 or early 2017 listed on the timeline. Savolitinib is a first in class inhibitor of mesenchymal epithelial transition factor (also known as cmet). This drug is partnered with AstraZeneca.

Fruquintinib is partnered with Eli Lilly and targets vascular endothelial growth factor receptors. The drug has already established major points of differentiation to other approved VEGFR treatments. These approved drugs are Sutent, Nexavar, and Stivarga. These drugs are or once were blockbusters and show the potential here if frugquintinib can truly be different than the approved treatment options. A Phase III is entering registration in China to target colorectal cancer and non-small cell lung cancer. A Phase II study on gastric cancer will also take place in the second half of this year.

Other highlights of the top seven clinical drugs are:

· Sulfatinib - tumor shrinkage of 30% in Phase I, enrolling in Phase III, maintain worldwide rights

· HMPL-523 - targets spleen tyrosine kinase, aka Syk. This is an area shown to siginificantly advance rheumatoid arthritis, a drug market worth $36 billion globally in 2015. Hutchison maintains worldwide rights and notes that Gilead Sciences is the only other known company working on Syk

The prospectus included what Hutchison China MediTech refers to as its "Vision & Strategy":

· Design drug candidates against novel but well characterized targets with global first in class potential

· Focus our research and development efforts on kinase selectivity to generate global best-in-class products

· Continue to invest in our fully integrated innovation platform

· Pursue a practical and efficient clinical and regulatory strategy

· Maximize economic interest in our drug candidates through in house development and later-stage strategic partnerships

· Leverage and expand our commercial platform

As mentioned above, Hutchison China MediTech has a strong commercial platform that helps bring in ample cash. The company has a network of more than 1900 sales representatives covering more than 16,500 hospitals in 300 Chinese cities. The company's consumer health business generate net income of $25.2 million in 2015, an increase of 10%.

To go along with the company's strong commercial platform, it's worth noting the relationship with CK Hutchison. The Hong Kong based conglomerate owns more than 60% of the company. With its relationship, Hutchison China MediTech gets easier access to two retail chains owned by CK Hutchison: Park n Shop and Watson's. This two chains represented sales of $8.1 million in 2015. While it's not a make or break for the company, it is definitely a good relationship at the moment giving the company access to two large chains in Asia.

Hutchison China MediTech dominates in the consumer categories. The company is a market leader in its key three sub-categories with market shares of:

· RX Cardiovascular: 35%

· OTC Anti-Viral: 51%

· OTC Angina: 33%

Overall the financials of Hutchison China MediTech look strong. Here is a look at the company's revenue over the last three years:

 

Sales of Goods

Total Revenue

2013

$8.7 million

$36.5 million

2014

$59.2 million

$87.3 million

2015

$118.1 million

$178.2 million

Click to enlarge

One of the biggest revenue contributors in 2015 was licensing/collaboration revenue. This totaled $44.1 million in 2015. The company has earned a nice share of upfront money from Eli Lilly and AstraZeneca. In 2015, a $33.1 million cash payment came from Eli Lilly for entering the Phase II stage. Through 2015, the company has seen $96.5 million in partner payments. There is $360 million in possible milestone payments still on the table for the company. It is worth pointing out that a collaboration with Janssen (NYSE:JNJ) was ended last year, taking away one of the company's U.S. partners. In 2016, the entry of Savolitinib into Phase III trials will trigger milestone payments.

Take a look at the trading ranges of shares (52 Week low to high) of Hutchison over the last five years to see how investors have come on board for the future of this company.

· 2011: $3.66 to $7.69 ($USD)

· 2012: $4.52 to $6.39

· 2013: $5.77 to $8.88

· 2014: $8.63 to $21.27

· 2015: $16.40 to $39.41

Shares traded around $32 at the time of the filing. Remember each Ads is half the value of a normal share, so the 2015 range in ADS is actually $8.20 to $19.70.

After early reports suggested an opening price of $16.33 per ADS, shares of Hutchison China MediTech priced at $13.50. Since their debut on Thursday, shares have traded between $13.02 and $14.20 with a current market capitalization of $763 million. The company sold 7.5 million ADS for proceeds of $101.25 million. The company listed plans for proceeds of $86.6 million in its prospectus:

· $41.0 million to advance drug candidates

o $20.0 million for HMPL-523 Phase I Rheumatoid Arthritis, lupus, and hematological cancer

o $12.0 million for Sulfatinib NDA in China, additional studies

o $7.0 million for Epitinib Phase III China, Phase I in US

o $2.0 million for tehliatinib Phase I China head and neck cancer

· $27.0 million for the company's share of development for partnered drugs

· $11.0 million for preclinical drugs

· $5.0 million to build production facilities

After reading through the prospectus and reporting all my findings here, I believe this is one of the best looking IPOs I've seen in recent months. This stock has great upside potential with a nice pipeline of potential blockbuster drugs in both North America and Asia. The company's key relationships with AstraZeneca and Eli Lilly take away some of the risk associated with Chinese stocks. The company's current consumer model creates a nice basket of cash to fund the future pipeline and provide base revenue and earnings for investors.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in HCM over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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